Funding is Out There — Find the Right Investment for Your Business

As an investor for the Salesforce Ventures Impact Fund, I work with leaders of innovative enterprise cloud companies — specifically those that help solve many of the crises we face as a society today. Through our $150 million fund, we invest in businesses across education; workforce development; sustainability; non-profit technology; financial inclusion, and digital health.

We are also highly focused on investing in women and underrepresented founders due to the challenges they face in securing capital. At Salesforce, we believe that businesses can be powerful platforms for change and that it is our responsibility to further Equality for All. This starts with providing an equitable system to fund the most innovative cloud companies and founders globally that are core to the Salesforce ecosystem.

In 2020, VC funding to female-only founders dropped to just 2.3%, compared to an “all-time high” of 2.8% in 2019. — Crunchbase

I recently joined a panel with the Salesforce Women Founders Group on “Diverse Founders’ Access to Capital,” along with:

• Sara Hale, Founder, Coastal Cloud (Moderator)
• Joelle Kayden, Managing Partner, Accolade Partners
• Sherrick Murdoff, Partner Investments and M&A, Salesforce
• Jordan Richards, Managing Partner, Sverica Capital Management

We discussed the ways in which diverse-founded companies can seek investment, the different types of funding available, and when a company should seek one type over another. Let’s look at a basic overview of the most popular types of funding and what benefits (and drawbacks) they bring to early and scaling businesses.

1. Grants

A grant is funding provided to an entity for a specific purpose linked to a public benefit. There’s a whole slew of available grants that are suitable for a multitude of business types, missions, industries, stages, or even founder backgrounds.

Benefits

One of the best things about grants is that they usually don’t require repayment. This also means they don’t bear any interest that requires monthly payment. Plus, they’re non-dilutive, meaning they don’t require forfeiture of equity or ownership. This is especially helpful for earlier stage companies that need funding to progress their mission-driven business, but don’t yet have visibility into their future revenue and don’t want to give up ownership of the company.

Drawbacks

Applying for grants can be a lengthy process. You may need to set aside significant time researching the right grants and filling out tedious applications. In addition, many grants come with restrictions on using the funds and may require reporting. This could limit a company as they determine their next steps. If a company wants to pivot in a way that better suits their business, and the grant they received has stipulations around how to use the funding, the capital may not be available for use in that way.

Salesforce recently had the opportunity to award a grant through Black Entrepreneurs Day, hosted by Daymond John, founder and CEO of FUBU and star of ABC’s Shark Tank. The NAACP Powershift Entrepreneur Grant went to Staci Childs, owner of Sunnyside Legal in Houston, TX and was part of $250,000 in NAACP grants to Black-owned businesses across the US.

2. Debt/Loans

There are a number of different types of loans:

• Revolving loans provide companies with a set amount of credit with the bank that business owners can take out as needed, while only paying interest on the amount they have outstanding.
• A loan against receivables is financing made available on the expectation of repayment from funds generated from current or future trade receivables.
• Other debt and equity financing options exist for fast-growing companies that are looking to raise venture capital funding in the future, but need to bridge the gap between financing rounds. One commonly used form of financing is a convertible note, which unlike the other forms of debt, such as term loans, can be converted into equity in the company. Many early stage startups utilize SAFE notes, which are a simplistic version of a convertible note meant to help jump start a company but do not have any interest or maturity. Debt for a startup, particularly venture debt, is a complex space with many nuances; this article by Kaufmann Fellows provides an excellent overview of the various types of financings available.

In addition to the different types of debt, there are also different types of lending institutions to consider, including commercial banks, community development finance institutions (CDFIs), crowdfunding platforms, and more.

Benefits

Businesses of any size can take advantage of debt or loans. Bank loans are also typically non-dilutive, meaning all equity and ownership are retained.

Venture or convertible debt can typically be tailored depending on the needs of the company and the issuer. Some types of notes require a monthly interest payment, while others might compound the interest at the end to be included in the total value of the amount converted into equity.

Drawbacks

On the flip side, the loan amount you procure may be based on historical business performance, which is a challenge for new businesses that don’t have collateral or a robust background. Loans also include interest payments, which require cash outlay on a monthly basis. In addition, the debt will need to be repaid at the loan’s maturation.

Unlike traditional debt, debt for fast-growing venture startups can be dilutive if the debt converts into equity in the company in lieu of cash at the next round of financing.

3. Crowdfunding

Crowdfunding brings together a whole syndicate of investors who can invest various amounts of capital into the business. Companies that are just starting out can leverage crowdfunding to get their business off the ground and receive an initial influx of capital. The method has become especially popular with the rise in innovations and platforms that can connect investors to companies.

Benefits

Crowdfunding is a good way to engage potential customers in the future profits and success of the company, while giving access to capital for businesses that may lack a friends and family investor network. Crowdfunding also typically requires less effort from the company in terms of preparing for investor meetings.

Drawbacks

Crowdfunding terms can vary based on what the company sets forth, but may require dilution of ownership as investors will want an equity stake in the company.

“Take investments from people who are going to help you along the way. You can always learn from people. I think that can really help you and give you more than just cash.” — Sherrick Murdoff Partner Investments and M&A, Salesforce

4. Incubators and Accelerators

Incubators and accelerators are best-suited for individuals who have an idea but don’t yet have the team to build it out. They specialize in taking early-stage startups looking to raise venture funding and prepare them for a seed round of investment. An incubator helps entrepreneurs flesh out business ideas, while accelerators expedite growth of existing companies with a minimum viable product.

Benefits

You don’t have to have everything figured out yet. Incubators provide new founders with the business support, funding, and networking opportunities to grow. Accelerators help early founders build out their growth strategy, identify product-market fit, and prepare startups to go out for venture fundraising.

Drawbacks

Incubators function at a slower pace than accelerators, which require more structured, time-bound programs. These programs may also require strict attendance at training, workshops, and social activities, which can detract from normal business operations.

In addition, accelerators typically take an ownership percentage of the company in exchange for their services.

“Look for places where people can really help you build not only your company, but a community of people and founders that can be helpful to you longer term.” — Joelle Kayden Managing Partner, Accolade Partners

5. Venture Capital (VC)

There are a multitude of VC investors, including institutional investors, corporate venture funds (such as Salesforce Ventures), angel investors, and family offices, among others. These investors focus on different aspects of the investment cycle. Some, such as family offices and angel investors, might be the first form of equity capital a company receives and could invest prior to a fully formed product or go-to-market strategy. Others provide later-stage capital once a company has a product and customer base. Companies best suited for venture capital are those looking to accelerate their growth and move quickly to becoming a large business.

Benefits

Venture capital firms can afford large investments. With venture funding, you build out a group of investors who are specialists in various ways that can help your business either by making new customer introductions, helping hire the best talent, or advising on business matters and go-to-market strategies.

Drawbacks

Venture funding is not meant for every company, which is why finding the right investors who are well-positioned to help your company is critical. This form of funding is also highly dilutive and requires not only giving up equity in the company but also potentially control through board seats. Further, it requires investor approval to make certain decisions. Venture funds are also timebound, meaning they’re looking to invest in companies that want to scale quickly and achieve a successful exit (such as an IPO or M&A transaction) within a specific timeframe.

“Do your research, and be over-prepared for those meetings. There’s nothing that can close the door more quickly than being unprepared.” — Jordan Richards Managing Partner, Sverica Capital Management

There are many avenues for funding, and opportunities for underrepresented groups to gain access to capital are growing. As of FY21, more than 60% of the companies in the Salesforce Impact Fund portfolio have either a female or underrepresented founder.

Regardless of the funding avenue you choose, it’s important to build what you’re passionate about. That passion is what will help you through the really tough times in building your business. It will help you build better products. And, it’s what will shine through most in pitching to potential investors.

Watch the full Women Founders Group session, and stay tuned for more articles on gaining access to capital.